Brief Highlights about EOU
An EOU is basically an Export Oriented units which can be set up in the declared ‘warehouse stations’ in India. There are almost 300 such warehouse stations. EOU units are very closely connected with Customs Law and Excise Law. Besides, Foreign Trade Policy deals with EOUs at larger extent. Further, Income Tax Act and Foreign Exchange Management Act are also very relevant for EOU units. EOU not availing direct tax benefit are entitled to Duty Credit Scrip of VKGUY, FMS, FPS and SHIS.
Setting Up of a new EOU
Initially the unit have to prepare detailed Project Report as these forms the basis of sanction of the scheme. The NFE should be positive. Thereafter, the unit is required to obtain approval from the Unit Approval Committee (UAC) for automatic approval scheme and from Board of Approval (BOA) for schemes other than under automatic approval scheme. The afore-said authorities shall issue Letter of Approval after which a Legal Undertaking has to be submitted and Green Card shall be obtained from him. A Licence has to be obtained u/s 58 and 65 of the Customs Act. B-17 bond has to be submitted with solvency certificate or bank guarantee. CT-3 certificates have to be obtained.
Requirements of Positive NFE
The units should have a positive NFE (Net Foreign Exchange) which is A-B where A is FOB value of Exports and B is the sum total of CIF value of all imported inputs and capital goods and all payments (like commission, royalty, fees, dividends, interest on borrowings) made in FOREX. It is pertinent to note that the goods which are purchased on high sea sale basis in Indian rupees will be considered as imported goods for the purpose of calculation of NFE, even if payment is made in Indian Rupees as mentioned in Para 14 of MF(DR) circular No. 12/2008-Cus dated 24-07-2008. NFE Earning shall be calculated in a block of five years starting from commencement of production. Further, certain other aspects as mentioned in Para 6 of HBP Vol. 1 have to be kept in mind.
Failure to achieve NFE: It is worthwhile to mention that if NFE is not achieved then the unit is liable to pay duty and interest in proportion to default will be payable as per MF(DR) Circular No. 29/2003-Cus dated 03-04-2003. Further, if the NFE is not achieved then the EOU is not allowed to exit. A plethora of judicial pronouncements have dealt with the issue of failure to achieve NFE by EOU some of which is mentioned here-in-below for ease of reference:
a. In case of Natural Stone Exports (2006) 198 ELT 440, it has been held that duty is payable only at the time of de-bonding even in case of failure to achieve NFE as EOU is a warehouse.
b. In case of Suvarna Aqua Farm (2005) 190 ELT 284 it has been held that penalty cannot be imposed if export obligation was not fulfilled as the circumstances were beyond the control of the assessee.
c. In case of Noel Agritech (2011) 273 ELT 306, it has been held that in case of failure to meet export obligation, duty is payable but confiscation of capital goods is not warranted.
Procurement of Inputs & Capital goods
An EOU is entitled to procure inputs and capital goods without payment of duty. Thus, All India Rate of Duty Drawback cannot be taken by an EOU. Further, the EOU can procure inputs or capital goods under CT-3 from the manufacturer of such goods without payment of duty. Otherwise, the EOU units can procure goods on payment of duty which can be used for DTA sales by an EOU unit or refund can be claimed under Rule 5 of CENVAT Credit Rules, 2004 for the inputs &/or input services. The matter is no longer res integra as it has been held in a plethora of cases that Rule 5 of CCR’04 is also available to an EOU.
Bonding Period for EOU
The EOU units are the bonded warehouses. The bonding period for an EOU is three years for raw materials, consumables & spares and five years for capital goods. Bonding period means that the goods must be used by the EOU within the bonded period. The same can be extended by the Commissioner without any upper limit if the same is not likely to deteriorate. Warehouse licence is given to EOU for a period of five years which has to be renewed from time to time.
Exit of EOU (De-Bonding)
An EOU can opt out of the scheme only with the approval of Development Commissioner as per Provisions of para 6.18 of FTP. Exit from EOU is not possible in case positive NFE is not achieved under Advance Authorisation scheme.
The requirement of positive NFE is mandatory in case EOU is applying for EPCG after exiting as NOC is required to be obtained from the Development Commissioner. Export obligation for a unit which converts from EOU/SEZ scheme to EPCG would be same as available to direct EPCG authorisation holder, i.e., 8 or 12 years from the issue of EPCG authorisation. Further, it has been clarified that if a standalone EOU unit converts into EPCG scheme, the additional export obligation shall be equivalent to six/eight times of depreciated value. Further, if the unit of a Firm/company opts to de-bond then the average export obligation in respect of firm/company (other than debonding unit) shall remain unchanged. For the debonded unit, the export obligation shall be fixed by excluding the exports made by such unit from the exports of the company/firm.
Unit can be ordered to be exited if it fails to achieve NFE or other requirements. Duty on raw material, capital goods is payable at the time of debonding. It is pertinent to note that in case of Premier Granites Limited (2000) 122 ELT 220,it has been held that duty demand can only be raised after the order for exit has been issued. Further, in case of Trans Freight Containers (2012) 277 ELT 168, it has been held that even if export obligation is not fulfilled, duty can be demanded on inputs lying in stock at the rate of duty prevalent at the time of payment of duty, on original value of importation. Duty cannot be demanded on consumed inputs and final products were exported. Further, depreciation on capital goods (CG) is available even if export obligation was partially fulfilled.
It is worthwhile to mention that Hon’ble CESTAT in case of Tecumseh Products (2011) 269 ELT 401 has held that CENVAT Credit available with an EOU can be transferred to DTA unit on de-bonding. New IEC number will have to be taken at the time of exit.
Customs duty will have to be paid on unused imported raw material and consumables lying in stock at the time of exit at the rates as on date of clearance. In respect of excisable goods, excise duty is to be levied without depreciation at rates as on duty of clearance –Pune Commissioner of Customs PN 131/99 dated 09-09-1999. At the time of exit, the unit has to pay customs duty on the imported machinery on the basis of depreciated value or transaction value – whichever ishigher. The depreciation rate is 4% per quarter in the first year, 3% per quarter in the second year and third year, 2.5% per quarter in the fourth and fifth year and 2% per quarter for subsequent years. The rates of depreciation for computer or computer peripherals are different which can be referred in Para 6.36.2 of HBP Vol. 1.
It is pertinent to note that if the unit is unable to achieve positive NFE, then the duty forgone at the time of import shall be paid on such goods in proportion to the non-achieved portion of NFE in terms of para 3 of MF(DR) Circular No. 12/2008-Cus dated 24-07-2008. In case of Solitaire Machine Tools (2003) 152 ELT 384, it has been held that depreciation should be allowed upto date of payment of duty and not only till date of application for de-bonding. In case of Business Process Technologies (2010) 249 ELT 248, it has been held that rate of duty is at the time of filing ex-bond bill of entry for de-bonding and not rate prevalent at the time of procurement of goods.
- By AdityaSinghania & NischalAgarwal